In a two-factor APT model, Dell Computer has a factor beta of 1.15 on the first factor portfolio, which is highly correlated with the change in GDP, and a factor beta of -.3 on the second factor portfolio, which is highly correlated with interest rate changes. If the risk-free rate is 5 percent per year, the first factor portfolio has a risk-premium of 2 percent per year and the second has a risk premium of - .5 percent per year,
a. Compute the cost of capital for the HSCC project that uses Dell as the appropriate comparison firm. Assume no taxes and no need for leverage adjustments.
b. What is the present value of an expected $1 million HSCC cash flow one year from now, assuming that Dell is the appropriate comparison? Assume no taxes and no need for leverage adjustments.
c. What is the cash flow beta and the certainty equivalent for the HSCC project?